Earnings Management in Response to the Introduction of Australian Gold Tax

Abstract:     
Earnings from gold mining in Australia remained tax-exempt for almost seven decades until 1 January 1991. In the early 1980s, rapid economic prosperity induced by escalated gold prices brought the Australian gold mining industry under intense political scrutiny. Using a variant of the Modified Jones model, this paper provides evidence of significant downward earnings management by Australian gold mining firms, which is consistent with their attempts to mitigate political costs during the period June 1985-May 1988. In contrast, test of earnings management over a similar period in a control sample of Canadian gold mining firms produced insignificant results. Further, empirical results are robust to several sensitivity tests performed. Later, the Australian firms were found to have engaged in economic earnings management during the period June 1988-December 1990. This is consistent with the sample firms' incentive of maximizing economic earnings immediately prior to the introduction of income tax on gold mining. The findings of this study help to understand the impact of earnings management on the efficient resource allocation in an economy. They also contribute toward understanding the linkage between regulation of accounting for special purposes and general purpose financial reporting.

Keywords: political costs, earnings management, discretionary accruals, gold mining

JEL Classification: M41, M43, L71

Accepted Paper Series